Forget Dow 20000, How About Dow 40000...By 2030

No doubt, the big event of the past week was the Dow Jones Industrial Average coming oh so close to hitting the 20000 level. The popular market gauge was less than half a point away on a couple occasions on Friday, though it could not quite pierce the psychologically important figure. Of course, the Dow has little meaning for most professional investors, given that it is a price-weighted index with Goldman Sachs nearly 8 times as important as General Electric even though the latter is more than twice as big a company from a market cap perspective.

And, it is critical to understand that simply looking at changes in the Dow does not tell the full story when it comes to measuring investment performance. Indeed, none of the popular indexes, for that matter, include dividends or their reinvestment, in the simple price calculations. For those who don’t believe that this makes much of a difference, take a look at the actual returns earned by investors from 1929 to 1954, a period when the Dow started at 300.00 and ended at 280.89,…

…or 1966 to 1982, which started with Dow 962.25 and ended with Dow 875.00. Incredibly, Value Stocks, like those that we favor, returned more than 13% per annum during those 16 years!

The quest for 20000 has also provided another lesson in the Miracle of Compounding, as Alliance Bernstein Chief Investment Officer Seth Masters is now being hailed for a “bold” call he made back in July 2012. At the time, the Dow was 12,500, and Mr. Masters predicted that the index would reach 20,000 by the end of the decade. Obviously, it is right at that round number more than three years early, but it was hardly like the prognosticator was going out on a limb with his prediction, even as Mr. Masters recently said, “It really hit a nerve. People were so pessimistic back then.”

To be sure, as the table above illustrates, all the Dow had to do to rise from 12500 in 2012 to 20000 in 2020 was to appreciate by the same 5.4% rate that has been the historical average since 1896. And, though Mr. Masters has been in the investment game for 26 years, less time than yours truly, he had little interest in making a Dow 40000 prediction, saying recently, “It’ll be my successor who writes that one.”

Well, if historical averages hold, the Dow would double from the current level in about 13 years. There you have it – I’ve called Dow 40000 by 2030, the second time I’ve made such a long-term prediction. The first was back in August 2010 when I wrote…

It looks like TV host Ellen DeGeneres has it right when she laments, “Our attention span is shot. We’ve all got Attention Deficit Disorder or ADD or OCD or one of these disorders with three letters because we don’t have the time or patience to pronounce the entire disorder.”

Not surprisingly, investment commentary has had to become much more provocative with outrageous prognostications necessary to grab much in the way of attention. To be sure, playing on the twin emotions of fear and greed is nothing new as the latter was targeted with the infamous book Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market published in 1999. These days, fear is easier to tap into as last month we heard that at least one follower of Elliott Wave Theory projects a triple-digit Dow (yes, a loss of more than 90% from here) by 2016 and that an investment newsletter based on astrology actually questions whether capitalism, democracy, humanity and even Earth will survive the ‘Cardinal Climax’ that began on July 26.

While readers are well aware of our optimism for the long-term prospects of our broadly diversified portfolios of undervalued stocks, we know that there are plenty of headwinds facing the economy and the equity markets, including high unemployment, weakness in housing, massive budget deficits and looming tax increases. Of course, despite all of the uncertainties, our benchmark index, the Russell 3000, has risen in 13 of the past 17 months, with July returning 6.9%. And while fear levels have subsided, we like that contrarian indicators, such as investor sentiment, mutual fund flows and consumer confidence are in ‘buy’ territory. Also, corporate profits in Q2 handily beat expectations, valuations remain reasonable and interest rates are still very low. Weighing everything, then, we think it prudent to focus on inexpensive, larger-cap, less-volatile, generally-more-stable-in-terms-of-cash-flows, dividend-paying stocks. Not a shocking strategy, perhaps, but we think it the right way to tread.

That being said, perhaps we could spice things up by tweeting a ‘2016 by 2016 on the S&P 500’ proclamation.

As always, please note that payment of dividends cannot be guaranteed, and past performance does not guarantee future returns.

John Buckingham of AFAM Capital lends his over 30 years of investment management experience to two crucial leadership positions. He serves as the editor of The Prudent Speculator, which has been a top-ranked investment newsletter, in terms of total return performance, many ...